Vp is a specialist rental business providing equipment and services to a wide range of markets including civil engineering, rail, oil and gas exploration, construction, outdoor events and industry, primarily (>90% FY19 sales) within the UK, but also from overseas.
Encouragingly, the existing business continues to bang out “excellent” numbers, such as today’s interims. Here, headline adjusted PBTA came in at £21.1m up 13% (vs £18.7m LY) on turnover 12% higher to £136m (£121.7m) - delivering EPS of 44.2p (+17%), 16% ROCE and a 6.8p dividend (+13%). Divisionally, the UK continues to be the standout performer, contributing 88% and 94% respectively of H1’18 revenues and EBIT - reflecting robust performances from construction, housebuilding, AMP6 water spend and infrastructure, particularly boosting Hire Station and Groundforce.
The trick to successful M&A is knowing the target inside-out, not over-paying and then integrating flawlessly to deliver the desired synergies. To us, on all of these fronts, Vp’s canny £68.8m purchase of Brandon Hire (924 FTEs) on 7th November (from private equity house, Rutland Partners) scores highly.
The price is attractive, equivalent to 2016 EV/EBITDA, EV/EBIT and EV/Book (debt/cash free) multiples of 5.6x, 11.5x and 1.9x – representing a discount to the sector and offering an immediate 8.7% Return on Investment (RoI, pre-integration). Although Brandon is not anticipated to make a material contribution to profits in FY18, we reckon there is plenty of scope to lift EBIT margins from 7.5% to >10% in due course, thanks to: cost/procurement savings, synergies, economies of scale and improved asset/inventory utilisation.
Strategically too, the deal looks a neat cultural, geographic and customer fit with Vp’s Hire Station (HS) unit. Indeed, with a branch network of 143 (typically smaller) sites, Brandon is a national operator servicing circa 20,000 SMEs, with regional ties to the South West, Wales and in/around towns.
Better still, the transaction should be strongly earnings accretive, with our FY19 adjusted EPS forecast climbing 17% from 78.3p to 93.3p. Similarly pushing up our valuation to 970p/share (vs 890p), equivalent to circa 11x and 6x next year’s EBITA and EBITDA for the enlarged group.
